Is buying a second home a wise tax strategy?

DEAR BOB: My wife and I bought a house in 1995 for $180,000.Since then, we have taken out home-improvement loans and now owe $320,000.Similar nearby houses sell for $600,000. In 2004, we bought our current homefor $640,000 and rented out our former home. We have been told if we sell ourfirst home within three years after buying our second home we won’t owe anycapital gains tax. Or should we try to sell it now although the local home salemarket is a bit slow? –Manuel A.

DEAR MANUEL: You received incorrect tax information. Buyinga replacement home is irrelevant. Also, the mortgage balance on your old homedoesn’t matter.

Purchase Bob Bruss reports online.

To qualify for the Internal Revenue Code 121principal-residence-sale tax exemption up to $250,000 for a single person (upto $500,000 for a qualified married couple filing a joint tax return), you musthave owned and occupied the home at least 24 of the last 60 months before itssale.

That means you have up to 36 months after moving out of yourprincipal residence to claim your tax-free sale profits. If you rent it longerthan 36 months, you lose your exemption.

However, since you rented the house after vacating, thedepreciation you deducted on your tax returns will be taxed at the special 25percent federal tax rate for recaptured depreciation. For full details, pleaseconsult your tax adviser.


DEAR BOB: My 81-year-old mom recently co-signed a 40-yearmortgage for my “derelict” sister. The loan is in my mom’s name butthe house deed has both her name and my sister’s name on it. My sister hasreally bad credit. Although she can afford it, she refuses to pay the mortgagemonthly payment to my mom, so mom makes the payment. My dad, age 79, is worriedabout his credit rating. I say, at their ages, does it really matter? My motheralso has dementia so my sister and the bank took advantage of her. What shouldshe do? –Dee G.

DEAR DEE: If your mom stops paying the mortgage payments,the bank will foreclose on the house. Should it not sell for enough to pay offthe mortgage, the bank could come after your mom for any deficiency loss(although that is highly unlikely).

Of course, if that happens, your mom’s credit will beruined. But, as you say, at age 81, who cares?

This extreme situation shows why an individual should notco-sign for credit to primarily benefit another person, especially a”derelict.”

If you and your father knew this was going on, you shouldhave stepped in to stop your mother from co-signing for your sister.


DEAR BOB: A few weeks ago you had a question from a man whowanted to add his girlfriend to the title to his house. You suggested use of aquitclaim deed to convey a half interest. My question is after quitclaimingyour title, how can you get it back again? I’m asking because in two years Iplan to add my boyfriend’s name to the title of my home we will share as ourprimary residence before selling it two years later –Jeanne S.

DEAR JEANNE: When a property owner signs a quitclaim deed,he conveys whatever interest is desired, such as 50 percent or 100 percent, hashis signature notarized, and the deed is recorded to complete the conveyance.After title is transferred, the grantor can’t get that title back again.

Before you transfer a partial interest in your property toyour boyfriend, please consult a local real estate attorney to determine thebest way to hold title. Also consult your tax adviser to discuss the taxconsequences.


DEAR BOB: As part of my divorce settlement two years ago, Isigned a quitclaim deed on the house that was in both our names. The mortgageis still in both our names. He has since remarried and is still living in thehouse. He says he can’t refinance and isn’t sure when he is going to sell thehouse. If something were to happen to him, it is my understanding I will stillbe responsible for the mortgage payments. Would I get the house? Or would it goto his wife? Can I make him refinance? I really want my name off the mortgageand the house –Teresa B.

DEAR TERESA: If you had a decent divorce attorney, he or shewould have resolved these issues in your divorce agreement. Because you signedthat quitclaim deed, your ex-husband now owns the house in his name alone.

But your name will always remain on the mortgage obligation.The lender is 99 percent certain to never release you from liability, and youcan’t force your ex-husband to refinance. It’s a shame this wasn’t handled aspart of the divorce.

If your husband dies, his living trust or will determineswho receives title to his house. By signing that quitclaim deed, you are out ofthe picture to receive the house unless he wills it to you (very unlikely).

Sorry to be the bearer of bad news. But there is nothing youcan do to force your ex-husband to refinance or sell the house to get your nameoff the mortgage.


DEAR BOB: What is the best tax strategy for my mother togive me her rental house? Initially, we bought it together, but when it wasrefinanced my name was taken off the title –Jan B.

DEAR JAN: The best way for you to obtain title to thatrental house is to inherit it after your mother dies. Then you get a newstepped-up basis of market value on the date of her death.

If she gifts the house to you now, then you take over herpresumably low depreciated adjusted cost basis for the rental property. Also,she must file a federal gift tax return. But no gift tax will be due unless shehas given away over $1 million in lifetime nonexempt gifts exceeding $12,000each. For full details, please consult your tax adviser.


DEAR BOB: I am 64, single, and retired. I have a $125,000mortgage with an adjustable interest rate currently at 6.3 percent (it can goup to 11 percent). My home is worth about $550,000. I am not planning to sell,but am thinking of refinancing at a 6.375 percent fixed interest rate. It wouldcost me $2,000 in fees ($1,000 in lender fees and $1,000 in title and escrowcharges). Do I really need to spend $2,000 to avoid any future interest-rateincreases? –Richard L.

DEAR RICHARD: It’s up to you to decide if spending $2,000 tolock in your interest rate at 6.375 percent is worth the $2,000 expense andhassle. I can’t give you a payback analysis because you won’t be savinganything. But you won’t have to worry about rising interest rates.


DEAR BOB: After I moved into my home, the neighbor insistedmy trees are cracking her patio foundation. The seller knew about this butdidn’t tell me. I then hired an arborist. According to his report, my trees arenot directly affecting the neighbor’s home. I do not want to remove my threetrees because they make my home secluded. There is a PUD (planned-unitdevelopment) association. What are my rights as a homeowner? –Lori K.

DEAR LORI: Depending on the exact facts, it sounds like youhave no liability if your trees are not damaging the neighbor’s house or patio.The PUD association probably has no involvement because the homeowner’sassociation just manages the common areas, not the individual homeowner lots.For more details, please consult a local real estate attorney.

The new Robert Bruss special report, “The 20 EssentialQuestions Smart Home Buyers Must Ask to Avoid Overpaying in a Buyer’sMarket,” is now available for $5 from Robert Bruss, 251 Park Road,Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internetdelivery at Questionsfor this column are welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center

Copyright 2006 Inman News

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